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Brazil Raises Interest Rates To 11.75%

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Brazil's central bank has raised its key interest rate to 11.75% in a bid to hold down inflation in one of the world's fastest-growing economies.

The rise, from 11.25%, is the second half-point increase since the start of the year.

It is also the second under President Dilma Rousseff and central bank head Alexandre Tombini, both of whom took office in January.

Inflation was 5.91% last year and is forecast to remain above 5% in 2011.

The rate rise came on the same day as news of a modest rebound in Brazilian industrial production, which increased by 0.2% in January from the previous month.

This was far better than the consensus forecast of a 0.7% decline and came after a 0.8% month-on-month decline in December.

Currency headache

Although the rate rise may help to curb inflation, it risks sucking in foreign money, increasing upward pressure on the already overvalued Brazilian real.

Capital inflows from outside Brazil have soared as investors flee record-low rates in more developed countries.

Increasing the interest rate doesn't appear to be damping inflation.

What do Brazilian banks offer on savings?

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Increasing the interest rate doesn't appear to be damping inflation.

What do Brazilian banks offer on savings?

Difficult to get an account as a foreigner.

Also their inflation figures are even more of a lie than ours.

So it's not quite the savings haven it appears, especially as if there's a general crash like in 2008 you can expect the real/GBP exchange rate to change significantly.

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... and if the currency is increasing in value due to massive inflows.

Hang on, sounds a bit Icelandic doesn't it?

One thing to look at is where the capital inflows are going. If they are simply bidding up existing assets, then it is a ponzi scheme. The assets will fall when the music stops.

On the other hand if the money is pouring in to build capital projects, then the society will be getting wealthier in real terms. And the gains are real.

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